As the world bond markets rush towards flooding the financial system with a deluge of negative rate paper, one has to ask the simple question… how many central bankers does it take to get to the center of a 10 year German Bund?
If you don’t know the answer to this play on words for an old Saturday morning tootsie pop commercial, then don’t feel bad because neither do I. However, with the magic of distorted economics and the miracle of Bundesbank monetary policy, we have now discovered what is at the end of negative interest rates for German paper.
No interest at all!
For those who don’t know, a zero-coupon bond is a debt security that doesn’t pay interest (a coupon), but is traded at a deep discount, rendering profit at maturity when the bond is then redeemed for its full face value. The significance of this is that the originator can collect their money for the bond during the origination sale, and not have to worry about paying off the security until its date of maturity. It also means that the bond is more often traded outside the originating bank, where the price of the bonds can fluctuate between different investors as it is bought and sold unlimited times prior to its maturity date.
In fact, a zero coupon bond is most often used by municipal or corporate issuers rather than from a sovereign government since the issuer wants the purchaser to hold the bonds long-term, rather than sell them back to the central bank early where they might skim the interest earned over time as is normally done with an interest bearing bond. And because of this, the issuer will normally sell them at a deep discount to face value because over time they will be paying off the proceeds with devalued money five, ten, or thirty years down the road.
No one in their right mind would ever buy a negative rate bond even in the short term because they would not only lose money by holding it if for any real length of time, but they would also lose purchasing power on their proceeds since governments and central banks naturally inflate their money supplies in our debt based global monetary system. Thus in desperation, Germany is now being forced to get rid of interest rates altogether if they want to be able to sell debt to a willing market.
As of the second week of July 2016, there are an estimated $14 trillion in negative interest rate bonds floating around the world, and that value is rising by nearly $1 trillion every two weeks. And with central banks expected very soon to begin their next round of quantitative easing, or in the case of Japan outright ‘helicopter money’, Germany appears to be the first of many who will ditch their system of interest rate bonds issuance, and force bond buyers (mostly central banks) to hold this debt long-term since it is very likely that almost all new debt will have to be monetized by the central banks since smart investors are bypassing this market entirely, and seeking real wealth protection in gold and silver.